Question

1.
the larger the MPC, the

a) larger the marginal propensity to save

b) higher the income level of the economy

c) smaller the change in income derived from a given change in
government spending

d) larger the multipler

2. With respect to the AE= output model, if aggregate
expenditures (aggregate demand) is $28 trillion and aggregate
output is $27.7 trillion

a. business will accumulte inventories and output will
decline

b. inventory will be depleted leading to an increase in
production and lower unemployment

c. inflation will be a problem if the full employment capacity
of the economy exceeds $10.3 trillon

d. both b and c are correct

3. assume the spending multipler is equal to 5, then a $1
initial increase in investment spending will lead to a

a) .04 percent increase to real GDP

b) 5 % decrease in real GDP

c) 5 % increase in real GDp

d) $5 increase in real GDP

e) $5 decreeae in real GDP

4. Assume that investment increase by $7 million. This will
increase equilibrium output (real GDP) by

a) more than $7 million

b) less than $7 million

c) between $6.5 and $7.5 million

d) exactly $7 million

Answer #1

Ans1. Part D) larger the multiplier

The higher the MPC, the higher the multiplier and vice versa. The relationship between the multiplier and the propensity to consume is infinite multiplier implies that MPC is equal to one and the entire increment of income is spent on consumption.

Ans 2. Part B. Inventory will be depleted leading to production and lower unemployment.

Ans 3. Part A. 0.04 percent increase in real GDP

multiplier of spending is calculated as = 1/MPS

5= 1 / MPS gives MPS =.20 which implies 5/.20 =.04

Ans 4. Part C) This will increase equilibrium output (real GDP) between $6.5 and $7.5 million

Suppose that you have the following information for an
economy:
Marginal propensity to consume - MPC
0.80
Autonomous consumption - A
$500
Planned investment - PI
$600
Net exports - NX
-$400
Government spending - G
$300
You will need this information for the questions that
follow.
Part 1:
When real GDP is equal to $4,500, aggregate expenditure is equal
to $ .
Part 2:
When real GDP is equal to $5,000, aggregate expenditure is equal
to $ .
Part 3:
When real GDP...

In an economy with no exports and imports, autonomous
consumption is $2 trillion, the marginal propensity to consume is
0.6, investment is $5 trillion, and government expenditure on
goods and services is $6 trillion. Taxes are $4 trillion and do
not vary with real GDP. If real GDP is $33.1, calculate
disposable income, consumption expenditure, and aggregate planned
expenditure. What is equilibrium expenditure?
The author got the equilibrium expenditure is $26.5 trillion
but the expert got 25. Please break down...

in the economy of coconut island, autonomous counsumption
expenditure is $50 million, and the marginal propensity to consume
is 0.8. Investment is $160 million, government expenditure is $190
million, and net taxes are $250 million. Investment, government
purchases, and taxes are constant-they do not vary with income. The
island does not trade with the rest of the world.
a) Draw the aggregate expenditure curve
b) What is the equilibrium real GDP for Coconut Island?
c) What is the size of...

Where marginal propensity to consume is denoted as MPC, consider
the following:
a. Assuming no crowding-out and MPC = 0.75, calculate the amount of
government spending needed to bring this economy back to
full-employment output.
b. Assuming no crowding-out and that $10 billion would be needed to
bring this economy back to full-employment output, calculate the
MPC in this economy.

1.
Assume an economy is opersting below its full employment capacity
and the MPC is .75, a $50 billion increase in investment spending
will cause the equilibrium output to rise by
a)$5 billion
b) $50 billion
c) $10 billion
d) $200 billion
2. when business and consumers become more optimitic about the
future and increase their expenditures?
a) real GDP rises and employment falls
b) real GDp falls and employment rises
c) real GDP and employment and income to decline...

Assume the following values: Marginal Propensity to
Consume b = 0.8; Autonomous Consumption a = 200; Investment
Spending I = 250. There is no government spending.
a) For a consumption function C = a + bY, what is the
equilibrium value for income Y in the economy? (The value at which
planned aggregate expenditure and planned output coincide.)
b) What changes when Investment Spending increases to 300? When
it drops to 225?
c) What effect can you observe in the...

The MPC for a closed economy is 0.75. Autonomous
consumption is $500, investment is $300, and government spending is
$400.
a) What is the equilibrium
level of real GDP?
b) If business increases
planned investment expenditure by 300 to 400, what is the new
equilibrium real GDP?
c) What is the slope of the AE
function in this economy and the value of the
multiplier?

lumn of the table.
Real GDP (Y)
Aggregate Expenditures
(Trillions of dollars per year)
G=$1 trillion
G=$1.50 trillion
(Trillions of dollars per year)
(Trillions of dollars per year)
0
1.25
1
2.00
2
2.75
3
3.50
4
4.25
5
5.00
6
5.75
7
6.50
8
7.25
9
8.00
10
8.75
The increase in government spending from G=$1 trillion to
G=$1.50 trillion results in shift of the AE curve, causing in
equilibrium real GDP that is than the change in government...

Suppose that the MPC = 0.75 and the MPIM = 0.15. Full employment
real GDP is equal to $1000 million and actual real GDP is $750
million. What change in government spending is necessary to bring
the economy to full employment?
A. change in G = $100 million
B. change in G = $200 million
C. change in G = $250 million
D. change in G = $625 million
E. change in G = $1250 million

Assume that the MPC is .8 in an economy that has an aggregate
supply curve with a slope of 1. Also, suppose that the price level
is flexible downward. A decrease in investment spending of $10
billion will shift the aggregate demand curve leftward by: (Show
Steps)
A. $50 billion and decrease real GDP by $50 billion.
B. $50 billion and decrease real GDP by $25 billion.100%
C. $10 billion and decrease real GDP by $10
billion.
D. $10 billion...

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